Is the Indian economy going gangbusters or losing steam? Well, both may be equally true, depending on which variable one is looking at. But before that, it must be highlighted that the growth numbers in both the first quarter and now the second have come in way higher than the consensus forecasts, instilling some humility in economists and forecasters.
Real GDP growth has clocked 8.2 per cent in the second quarter, following a print of 7.8 per cent in the first quarter. This number seems all the more heartening as it has come in the wake of the imposition of US tariffs and huge geopolitical uncertainties.
Sectorally, a sizeable jump of around 9 per cent in manufacturing and services explains the stellar performance. But this was aided by a low base, sub one per cent deflator, frontloading of export orders to avoid tariffs and stockpiling for the festive season and GST rate cuts. On the expenditure side, private consumption jumped by 90 bps as compared to the previous quarter, strongly supported by fiscal and monetary measures. Investments, on the other hand, remained strong but slowed a tad.
However, in nominal terms, which is after accounting for inflation, the economy has continued to slow from 10.7 per cent in March to 8.8 per cent in June and now to 8.7 per cent in the September quarter. This is in contrast to real GDP growth of 7.4, 7.8 and 8.2 per cent during the same period.
So, the real economy is growing handsomely while the nominal economy is slowing sharply as inflation has fallen faster. In fact, nominal GDP has now clocked single-digit growth in five out of the last six quarters.
So, what does one make of the nation’s economy?
We live in a nominal world. Low nominal growth means lower costs and prices, but also weaker revenues and incomes. There are winners and losers. Companies that have pricing power turn out to be winners, whereas the rest see revenues and margins decline. It also imparts more downward pressure on the fisc. The FY26 budgetary assumption is of 10.1 per cent nominal growth. Key targets, like the fiscal deficit, are measured as a percentage of nominal growth.
In absolute terms, nominal GDP has shrunk during the quarter, and hence the numerator, that is, the deficit percentage, automatically gets bigger, putting the government’s budget targets under strain. It can also weigh on tax collections. Net taxes have, in fact, risen 9 per cent during the first half of the year, mirroring nominal GDP growth.
So, what about the outlook for the rest of the year? There are three factors to keep in mind. One, there is a question mark on the extent of stimulus from GST rate cuts — whether it was a one-off or will continue to buoy consumption. The second uncertainty pertains to the continuing US tariffs — the longer they continue, the deeper the impact could be on jobs and output.
And last is the data uncertainty that looms as India will see quite a few dataset revisions in early 2026 — the GDP as well as the CPI base years are set to be revised in February, and the revamped IIP series will be released in May. If the past is any indicator, the new numbers could throw in some unexpected googlies.
With the stellar GDP growth rate of 8.8 per cent in the first half of the year, the asking rate for the second half is just 5.7 per cent based on the RBI’s revised projection of 6.8 per cent for the full year, which may have to be revised again.
So, where does this leave the MPC? As Reserve Bank of India Governor Sanjay Malhotra reiterated, there is ample scope for another rate cut. But with 8 per cent plus growth and near-zero inflation, the question is why, rather than how much and when.
The writer is Group Chief Economist, L&T. Views personal
